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Pastimes : Ask Mohan about the Market
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To: tekgk who wrote (6829)11/2/1997 1:40:00 PM
From: Cynic 2005  Read Replies (2) of 18056
 
tekgk, great round-up of monetary cross-flows across the international boundaries.

You said:
The first and largest is the yen carry trade. This involves borrowing in yen at around 1% and investing in U.S. Treasury notes at around 6%. The yield spread can and is being amplified with leverage. It worked very well for awhile, but an anticipated decline in the dollar will keep new money from entering and will eventually cause existing investors to exit very quickly or face horrendous losses once the return to the long term trend resumes.

May be I am hung-up too much on this one issue alone. But I think that if the dollar weakens 6% of more against the Yen, this could bring an avalanche of selling in treasuries and the liquidity problems could worsen sending the markets in to tail-spin. Last week $ was not particularly strong against the Yen. BTW, do you know how exposed are the Latin American countries like Brazil and Chile to the $ and/or US treasuries. The way I also see it, as someone else pointed out here on the BK thread, is that the stock market turmoil in Brazil could hasten repatriation of their assets from the US. After all, keeping aside all the flight to quality talk (i.e. buying US stocks dumping far east and latin American securities) I have tough time accepting that the Japanese and other nations Govts would rather rescue their economies than keeping their assets liquid by stocking in the US markets. Yes, I am speculating.
Your logic that $ can be dumped in favor of Euro sounds plausible. But, aren't we a bit far away for that?
Once again, a great post and thanks for sharing your wisdom with us.
Best regards.
-Mohan
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